Column: Hawkish on inflation, softish on growth

But the decision was not really as straightforward as it may appear. In many ways, this review by the Reserve Bank of India (RBI) was close to the sharpest edge of the classical central banker’s dilemma, whether to cut rates and boost growth or raise them to contain inflation. In a rather unusual show of transparency, the Chief Economic Advisor himself had commented publicly a few days ago advising RBI to take into account slumping industrial production and hold back on raising rates. Probably he was just giving an opinion, not really trying to influence RBI, for if it was the latter the choice of communication channel could hardly have been more counter-productive. In any event, the latest inflation figure, northwards of 9%, is away from RBI’s “comfort zone”—and it better be—while the slump in the April’s year-on-year index of industrial production (IIP) to around 6% is equally lacking in comfort for the growth advocates.

The governor chose inflation as the bigger evil. The choice is well grounded in both economic theory and central bank wisdom. It is difficult to argue with RBI’s view of things—the relative importance of the two threats—explained in the quarterly review.

How much dent a 25-basis-point rise is going to have on inflation immediately

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